Even the Best Central Bankers Can't Work Miracles

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”Read More.

You have to sympathize with European Central Bank President Mario Draghi. In the absence of any fiscal stimulus from euro-zone governments, he's dug deeper and deeper into the previously unread textbook chapters on unconventional monetary policies. His reward? An ear bashing from Germany, stubbornly below-target inflation, and a Fight Club-style dilemma that forbids him from talking down the euro or discussing helicopter money.

The key takeaway from Thursday's ECB meeting is that the de-facto cease-fire in the global currency war, agreed quietly at February's Shanghai meeting of Group of 20 large economies, seems to be in force. Draghi did his part to keep the peace at a March 10 press conference, saying that "we don't anticipate that it will be necessary to reduce rates further." The euro had been happily on its way down to $1.08; by the time currency traders were enjoying their first evening tipple that day, it had strengthened to $1.12, its highest in almost a month.

Given that a weaker euro had been one of the few bright spots in Europe's economic firmament, Draghi was expected to talk his currency back down today. But asked directly about last month's comment, he ducked and weaved -- and the euro remains at about $1.13, having briefly visited $1.14. So the current detente is holding: the U.S. doesn't raise interest rates, China doesn't devalue the yuan, and the rest of the world stops trying to goose growth and exports with beggar-they-neighbor currency weakening.

Draghi was also asked to revisit March's comment on helicopter money, which he described as "a very interesting concept." That earned him a slap down from Bundesbank chief Jens Weidmann, who dismissed the idea as "absurd." Draghi had a copy of last month's remarks to hand; asked twice whether it would be legal for the ECB to inject money directly into the economy, as envisaged by Milton Friedman, Draghi said "we haven't discussed it." For a topic that isn't being contemplated, though, ECB board members have referenced helicopter money in an awful lot of speeches.

It wouldn't be a surprise if the guardians of monetary stability are discussing even more drastic measures. The ECB's own bank lending survey suggests that while the current quantitative easing program may be propelling 80 billion euros per month into the banking system, it's failing to revive demand for credit from companies. Banks reported a dip in corporate loan demand in the first quarter; as this chart shows, the balance of banks seeing growing demand for money remains perilously low:

Moreover, the April lending survey results featured an ad hoc question tucked away (or buried, if you prefer) on page 46: "Over the past six months, for what purposes has your bank used the additional liquidity arising from the ECB's expanded asset purchase program? And for what purposes will such liquidity be used over the next six months?"

Not a single loan officer of the 141 surveyed said that ECB cash had "contributed considerably" to loans for non-financial corporates. Just 30 said the money "contributed somewhat," and 70 said it "had basically no impact." Those replies, moreover, were almost identical for the past half year and for the coming period.

"The answer is not monetary policy" former Bank of England Governor Mervyn King said earlier this week. Bank of Canada Governor Stephen Poloz said on Tuesday that policy "is close to its maximum ability," the same day that Reserve Bank of Australia Governor Glenn Stevens said central banks "need to be clearer about what we can’t do." Unless and until governments do their part to boost growth, monetary policy makers such as Draghi shouldn't be under fire for doing what they can with the available tools -- or for contemplating even more drastic action.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”Read more